GeoPark Limited (GPRK) Q4 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the GeoPark Limited Conference Call following the results announcement for the Fourth Quarter Ended December 31, 2019. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] If you do not have a copy of the press release, please call Sard Verbinnen & Company in New York at 1(212)687-8080, and we will have one sent to you. Alternatively, you may obtain a copy of the release at the Investor Support section on the Company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this webcast in the Investor Support section of the GeoPark corporate website. Before we continue, please note that certain statements contained in the results' press release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the Company seeks protections afforded by the Private Securities Legislation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the Company's SEC reports and public releases. Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of the Company's business. All financial figures included herein were prepared in accordance with the IFRS and are stated in U.S. dollars, unless otherwise noted. Reserves figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer; Augusto Zubillaga, Chief Operating Officer; Andrés Ocampo, Chief Financial Officer; and Stacy Steimel, Shareholder Value Director. And now, I'll turn the call over to Mr. James Park. Mr. Park, you may begin.

Thank you, and welcome, everyone. We're here this morning with our executive team in Bogota, Colombia to report on our fourth quarter and full year 2019 results. Congratulations and thanks to our team for delivering our 17th year of continuous performance growth with new operational, financial and portfolio expansion records, demonstrating again that GeoPark is following the right plan for our industry today with the right blend of skill sets and working in the right region. Our results this quarter and year include record oil and gas production, record oil and gas reserves, record asset values, record cash generation, record capital and cost efficiency, record acreage and asset expansion. This consistent delivery is the result of a rabid focus on the fundamentals of our business: One, being able to creatively find oil in the subsurface; two, being the lowest cost, safest and cleanest operator; and three, being a prudent buyer of new assets, always extending our future growth fairway. And, the character and quality of GeoPark’s growth is a big differentiator, beginning with the strength of our financial performance and balance sheet with industry-leading returns on capital and cost efficiencies, following with our ability to return meaningful value to our shareholders with a full mix of share buybacks, dividends and best-in-class stock market performance. This reflects what we see as the true, sustainable model for our industry today, with self-funded growth and consistently returning value to shareholders. It is important to emphasize the significant expansion of our project inventory over the years, including over 1.4 million new acres, hugging the still growing Llanos 34 block, one of the most profitable oil plays in Latin America today that just hit a key milestone of producing 100 million barrels, which is still only about 10% of the original oil in play. GeoPark's total 50 blocks, consisting of over 8 million acres represent prime acreage in 11 proven low-risk hydrocarbon basins with attractive leads and prospects with over 1 billion barrels of certified exploration resources, providing a deep fairway for our continued short, medium and long-term growth. These new projects also bring new partnerships with key players, including echo Ecopetrol, ONGC and Oxy. 2020 has already begun at full speed ahead for us with our closing of the promising Amerisur acquisition. None of these new assets, production or cash flow are yet included in our results. This acquisition brings with it the big pride CPO-5 block, adjacent to and on trend with Llanos 34, and we are working hard now to accelerate the exploration of over 20 identified prospects and the development and appraisal of three discovered fields. It also gives us an entry into the underexplored and underdeveloped Putumayo basin, which includes some high impact opportunities we are working on with and being carried by Oxy. We financed the Amerisur acquisition earlier this year with a successful and substantially oversubscribed seven-year bond, which closed at the lowest rate ever for a single B issuer in Latin America, and with the capital markets again voting their support for GeoPark’s team, business plan and consistent performance. With the recent movement in oil prices, GeoPark is ready to navigate through this volatility with a full toolbox of risk management instruments and levers at hand. These include our intentionally flexible work program, hedges in place, partnerships, capital efficiency, and our low cost production phase to generate cash at $25 to $30 per barrel oil price. A repeatedly proven GeoPark strength over the last 17 years is our resilience and ability to continue to perform through crises both big and small, so we are ready and moving. Underlying GeoPark's long-term success is our company-wide commitment to SPEED, our in-house integrated ESG systems, which were established at our founding, and which we continue to build on and improve. GeoPark's performance, reputation and opportunities are the results of our SPEED program and our pride in doing our job in the right way. Thank you. And we would be pleased to answer any questions.

[Operator Instructions] Our first question comes from Stephane Foucaud of Auctus Advisors.

Yes. Hi, guys. Two questions for me, please. First, in the context of the recent dropping oil price, have you seen the differentials in Colombia moving? And then, if we assume that oil price remains where it’s at the moment [ph] in the $50 barrel range, how would that affect [ph] your exploration program? I think, in this case, it would be going towards the lower end of the guidance. So, where would you dedicate your exploration dollar in that lower CapEx program? Thank you.

Hi, Stephane. Good morning. The connection is not very good. So, I will and try and to answer, and let me know if I got your question. The first one I understand is about the Vasconia differential in Colombia. Currently, we are seeing -- it was lower to around $2 per barrel differential at the end of last year. Right now, we're seeing it widening to more or less around $3 almost $4 per barrel. And our estimation for the year is to remain within those levels. And then, the second question was about if the low oil prices or below 50 oil prices remain for a long period of time, how would it impact our work program, is that right?

Right. That would be -- if the oil price remains in the 50, then the range of CapEx would be obviously lower. So, in this case, I guess, the amount of exploration capital would be less. And I was wondering which area you will be given priority to in that lower CapEx environment for exploration?

Right. So, as you know, our work program was designed from the beginning to be flexible and to be changed and adapted based on different oil prices. We expect to remain with more or less the same work program assuming oil prices as low as 50. So, within the level that we are seeing this quarter, we should be expected to keep most of it. If it drops below 50 for a sustained period of time, we may start reducing some of the investments. There are not particular targeted activities that we will reduce. But more or less the estimation is a potential reduction of $35 million to $40 million down, if oil prices remain below $50 per barrel for a more sustained period of time. Remember also that we have more or less 35% of our oil production hedge with floors of $55 Brent. Those hedges go until the end of the year for almost a third of our production -- oil production. So, those also help us push on this lower oil price situation.

And the $35 million to $45 million CapEx -- lower CapEx, so I guess some of that would be -- there is no specific area where we decide, but that's where the $35 million to $45 million will not be spent. For instance, it doesn't seem there will be less explorations in Putumayo, or less exploration of CPO-5, or in Chile, you don't have that level of granularity yet, if we have to be below $50?

No. Sorry. That $35 million or $45 million is associated only to our work program that we announced, which does not include yet CPO-5 or major [ph] activities. And then, I wouldn't characterized this as we target most explorations. If you remember, in 2015 and 2016, we did keep a portion of our campaigns even in lower price environments -- some of our campaign dedicated to exploration, because the importance of replacing our reserve. So, it would be a combination of development, some exploration, probably things like seismic and things that don't have immediate discoveries associated with them, may get delayed if oil prices drop below $50. So, we will give more clarity when we are in a situation to change the work program itself. Right now, preliminary, we’re going to say that if you want to assume oil prices below 50 for a sustained period of time $35 million, $45 million of reduction is a reasonable number to assume. And we will give more guidance if we are in a situation where we actually need to reduce the work program.

Our next question comes from the line of Alejandro Demichelis of Nau Securities.

Two questions, just to clarify and to follow up on the CapEx. So, you said that in the current CapEx guidance, it's not included Putumayo and it's not includes CPO-5. Is that right?

That's correct.

Okay. So, if we were to include the new parameter, what would be…

Just for clarity -- just to give some clarity on that particular point, maybe it's worth taking a minute to explain what it is. As you know, we closed the acquisition of Amerisur in mid January. This was a transaction that included a company listed in the UK with assets in Colombia, basically two groups affected, CPO-5, which is a non-operated 30% stake in a very large block, which is adjacent to the south and on trend of Llanos 34. And this is in our view one of the key assets that we brought with this acquisition. And then, the second set of assets is a group of assets in the Putumayo basin that has a producing field and also very large exploration acreage position, part of which is in partnership with Oxy. We are encouraged by Oxy in some of those exploration activities. So, we took over this company in mid-January. And since we closed the acquisition, we have been working with our partners in developing the work program for 2020. Our main goal for 2020 is to accelerate development and exploration activities in all of these assets. Some of these were more in control because we operate. And for CPO 5 itself, we have a relationship -- a very good relationship with the operator, which is ONGC. And we have been working very actively with them, designing the 2020 work program. That work program is not definitive yet. We have some preliminary agreements with them and I’ll explain what that is, but it's not yet definitive. So, until it is definitive, we are not going to give a formal firm guidance. We expect to do that hopefully when we release our operational update -- first quarter operational updates, which should come a few days after the closing of the first quarter. So, roughly, for CPO-5, we are estimating around five or six wells -- sorry, the potential of the block is very significant. We have identified three different plays jointly with ONGC. We have similar play types as we see in Llanos 34, including the continuation of the Tigana-Jacana trend into CPO-5, and those are Guadalupe formation and Mirador formation play. We have the two discovered fields that are producing already in CPO-5 that have wells that are performing better than most of the well in the Llanos basin. These wells have been producing flat for almost two years. One of these fields, Indico has 200 feet of net pay and is producing light crude, already accumulated over 2 million barrels in that period of time with no decline and no water coming in. So, we have identified more prospects of that play type. And then some Mirador opportunities also in the southeast of the block. In total, more or less and jointly with ONGC have identified between 20 to 25 prospects within GPO-5 block. So, our goal is to accelerate the development of the fields that are producing and the exploration of all of these prospects that have already been identified. On top of that, there's a third of the block that doesn't have 3D seismic yet and part of the plan for 2020, so also to cover that part with seismic. So, back to our work program. In CPO-5 itself, we're estimating hopefully to drill five to six wells, three exploration wells, three development, plus appraisal wells in the field that already exist within 2020, and acquire around 300 square kilometers of 3D seismic in the block. Net to GeoPark, these would be something around $20 million to $25 million. And again, this is not yet firm. This is something we are in conversations with the operator. And hopefully, we will be able to agree with them to at least conduct the majority of this work program. And then, in the Putumayo, we have some seismic acquisition and also some pulling jobs in the field that we are producing and some facilities as well, but in total have around $10 million to $15 million. So total CapEx program for these new assets could potentially be -- and again, I reiterate, this is not firm yet, it has to be completed with our partners, is roughly net to GeoPark additional $40 million to $50 million. This is self funded by both the cash obtained with the acquisition of the Company, which was roughly $40 million and the EBITDA, we expect to generate throughout 2020 with these assets which at $55 Brent is roughly $40 million to $45 million. So, hopefully, we will be able to give more clearance on this in a few months. But preliminarily, to give an order of magnitude, this is what we are looking right now. So sorry, I took a long time to answer your question, Alejandro. But, I think it was important for everybody to understand better what we're talking about.

And one more question just on CPO-5. Obviously, you have been in the field now for a month and a half, you have your agreement with ONGC. How do you see the production from the current two wells performing for the rest of the year? Are you assuming that that can stay at call it 7,000 barrels a day, or do you see that growing further?

We see some opportunities to -- well first, it depends on the drilling of the development and appraisal wells. If we finally decide with them to drill those wells, then the production will be increased. Additionally, we are in conversations with them, both reservoir engineering teams are discussing to see if there's an opportunity to increase production from the existing wells without jeopardizing the recovery factor of the fields. We always obviously want to maximize the recovery factor, delaying as much as possible the coming of the water. So, that is in discussion right now to see if there are opportunities to increase production from the existing wells. But for now, it will come mostly from the drilling of new wells.

Our next question comes from the line of Arthur Byrnes of Deltec Asset Management.

Over a year ago, you were highlighting your Peruvian acreage and proven reserves, and they were sort of supposed to scale in as your Colombian production started to level off or decrease. Since then, you've done Amerisur and you've thrown some cold water on Peru. Where does Peru stand? Is it just too difficult and is it five years away or what's happened there?

Yes. As you pointed out, our original plan with Peru was finally get the environmental impact study approved at the beginning of last year, and then investing in the facilities that were required to put the fields on production. And hopefully, sometime around these days, we should have been seeing the first start. Unfortunately, we encountered some unexpected delays, mainly as a result of the lack of definition on whether certain assets impact -- the environmental impact study requiring or not prior consultation from local communities, which is a lengthy process. Unfortunately, in the middle of this was political complications in Peru, which didn’t add or didn't help for clarity -- for more clarity to come in. So right now, the block is again in force majeure. Our team in Peru is developing a plan to work with the government and finally get clarity on what possible next steps can we make in Peru. So, currently, we're not anticipating to have the study approved in anytime during 2020. It's hard to say this is a five-year term. Hopefully, it's not. But currently, we don't have really the clarity to give you more firm definition on that.

But you haven't given up?

No, not yet. I don't -- also don't think we have the firm information to make that decision, yet. One of the benefits of the portfolio is that we have these step changes opportunities that if that is the only asset in your portfolio when some of them get delayed, then that's a much bigger problem. So, that's why we have the rest of our portfolio to keep going ahead.

Very good. Thank you…

Yes. Just to answer, Peru is still a strategic country. It’s part of the Marañon-Oriente-Putumayo petroleum system, which is one of the most prolific systems in Latin America. So, we still have hopes in the development of the oil industry in the country. It's one of the most underdeveloped rich systems in the region.

Very good. Thank you very much.

Thank you, Arthur.

Our next question comes from the line of Johanna Castro of Itaú BBA.

Good morning, everybody. And I just have a follow-up question on the CapEx program for assets of acquisition of Amerisur. Going back to the drilling program that Amerisur used to have, and used to show, they mentioned that they were going to do 2D seismic in the and run 3Dseismic in Tacacho and Terecay, and run 3D seismic Putumayo 8, and drill another well in Platanillo, like those kind of programs are the ones that you think you will follow or you are changing these plans and starting from scratch?

Hi. Good morning, Johanna. Some of those activities are the ones we're planning to do. In the case of Putumayo, some of them are subject to completion of the licensing, which takes some time, and we are taking over the work that had already been started. But, to give you an idea of what we are trying to do here, the investment on all of the Amerisur assets of 2019 was roughly $15 million; 2018 was $17 million, more or less. We’re trying to at least invest $50 million in 2020. And hopefully, if we get all of approvals in place, maybe more, we could raise it up to $70 million in 2020. So, what we're trying to do is completely change the face and the speed at which all these very-rich exploration potential has been developed so far and all the existing peers and the base they have been developed so far. We think a lot more can be done and much faster than it has been done in the past. So, our plan is to add more to what had already been started to be done by the prior company.

Okay, perfect. Thank you very much.

And also -- and in some of these activities in Putumayo, remember we have $100 million investment from which -- where our share was shared incurred by focusing some of those exploration activities.

Yes. And just to be more precise, since we don't have the information of the cash available at the closing of the year, I am assuming that because of this, I guess the restructuring that you have to do, you did have to lay -- let some people go and those kind of things. Do you still have the cash that was mentioned that the Company had at the close of September or at the end of the year was -- actually that cash was used?

Yes. It's roughly $40 million. I think it's a little less than what it was in September. But, it's not very different. There is not a significant change.

Okay. Perfect. Thank you.

That’s the cash that came with the, right, not of our consolidated cash.

[Operator Instructions] I'm showing no further questions at this time. I'd like to turn the floor back over to Mr. James Park for any additional or closing remarks.

Thank you, everybody, for your interest in GeoPark and for your continued support of our Company. We encourage you to please visit our operations in each country and call us at any time for more information. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.